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VIDEO & SLIDE DECK: ARE YOU PREPARED FOR QUAD #4?

Takeaway: Developing quant signals & fundamental data are supportive of investors adopting a defensive allocation w/ respect to the intermediate term.

In the following ~3-minute video, Senior Analyst Darius Dale walks through the key takeaways from our revised macro strategy, which we detail in a new 50-page slide deck jam-packed with thoughtful analysis and non-consensus conclusions.  

 

CLICK HERE to download the associated presentation.

 

CLICK HERE to view the aforementioned summary video. The investment conclusions are detailed below:

 

VIDEO & SLIDE DECK: ARE YOU PREPARED FOR QUAD #4? - 1

 

As always, please feel free to ping us with any follow-up questions.

 

All the best,

 

DD

 

Darius Dale

Associate: Macro Team


BNNY: This Will Be Ugly

BNNY remains on the Hedgeye Best Ideas list as a Short.

 

Annie’s is reporting 1QF15 earnings on August 7th AMC.

 

Trading at 33x P/E (NTM), BNNY continues to be overvalued and is likely to contract further as we believe the company will disappoint on Thursday and guide lower for the remainder of the fiscal year.

 

Over the long run, the Annie’s brand and continued growth of organics should power above average sales growth, but earnings will remain elusive.  Importantly, BNNY will not generate any operating profit this quarter.  The competitive pressures in the organic space, specifically in the Mac ‘N’ Cheese segment, will not abate anytime soon.

 

Earnings estimates have moved slightly lower during the quarter, as the organic segment continues to see slower trends.  Depending on how well the company is able to manage SG&A, we believe earnings will come in around ($0.05) for the quarter.  This is $0.02 below consensus, but it wouldn’t surprise us if the company is able to manage expenses to limit the damage in the quarter.

 

Our model generates lower sales than the Street, as well as lower gross margins and SG&A margins.  We’re expecting sales growth of +3% in the Meals segment, which would imply a slowdown from recent trends in the category, reflecting the recent deceleration in consumption and the UNFI deloading.

 

BNNY: This Will Be Ugly - 1

 

Following the release, we expect the FY15 consensus EPS estimate of $0.90 to be revised lower by $0.10-0.20. 

 

The risk to staying short is an outright sale of the company, but we don’t see this happening any time soon!

 

The table below outlines our risk/reward profile for the company.

 

BNNY: This Will Be Ugly - 2

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst

 



Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%

Home Price Appreciation Slowing

July CoreLogic Home Price Report


CoreLogic released its monthly home price report for June/July earlier this morning. Unlike S&P/Case-Shiller, which is a rolling 3-month average repeat sales index,CoreLogic is a single month index released on almost no lag. Essentially, it gives you information three months more current than what you get from Case-Shiller. 

 

CoreLogic estimates that home prices rose +7.0% YoY in July, a deceleration vs the +7.5% in June and +8.3% in May. We show this in the first chart below.

 

Interestingly, in the past few months we've seen material upward revisions to the preliminary estimates for the most recent month-ended. In the last two months, however, the revision was negative. The preliminary estimate for June was +7.7% and the final number came in at +7.5%. Meanwhile, May has been downwardly revised twice in the last two month. It began at +8.9%, was cut to 8.8% and is now 8.3%.

 

Its also worth noting that while sales comps begin to ease through 2H14, price comps don’t really begin to ease until Feb 2015 (hardest near-term comp is Oct which was +11.9% YoY). As such, we think the next 6-8 months of worsening pricing data will weigh on the housing complex.

 

Our main thesis on housing is that the rate of home price appreciation will slow meaningfully over the course of 2014 and into 2015. Historically, inflections in the rate of HPI or HPD have been major macro drivers of relative positive or negative performance.

 

Home Price Appreciation Slowing - chartA


MGM & MACAU OBSERVATIONS – NOT GOOD

Drilling down, MGM’s quarter was not as good as advertised.  Macau commentary flashed some warning signs.

 

 

THE CALL TO ACTION

We remain negative on most of the Macau operators – Galaxy (0027.HK) is the exception – and MGM’s Q2 earnings and call did not provide any relief.  MGM maintains the lowest exposure to Macau of the major gaming operators but the company disappointed us in the US as well.  Going forward, lower flow through, tough comparisons, and new supply could temper sentiment for the Strip.  However, our real concern remains Macau and MGM management’s tone and commentary seemed to provide some backing for our Mass decelerating thesis.

 

MGM’S Q2

Here are two takeaways from MGM’s Q2 earnings release.

  • MGM reported wholly owned adjusted EBITDA of $414 million, up 10% over last year.  However, if you normalize hold in both periods, EBITDA was roughly flat.  That seems disappointing to us given the excitement about a surging Las Vegas recovery and the solid RevPAR gain of 6% generated in the quarter.
  • MGM Macau disappointed with net revenues in line with our projection but EBITDA fell $14 million below our estimate and $18 million below the Street.  From our estimate, it looks like yet another Macau property missing on margins.  The below normal VIP win % of 2.7% was already reflected in our model.  We estimate margins should’ve been over 100bps higher than the actual EBITDA margin of 25.4%, given the higher Mass mix of revenues in Q2 2014 versus Q2 2013.

 

MASS WARNING SIGNS FOR MACAU?

MGM’s earnings call probably provided the most important takeaways.  MGM China CEO Grant Bowie seemed to hint that there could be a Mass slowdown this summer.  While not discussed by the Street because it conflicts with their "Mass Is Great" thesis, June Mass growth decelerated to +27% from 30-40% in recent months.  Bowie’s comment about Macau seasonality emerging similar to other mature markets suggests that Mass growth in July and August could continue to decelerate.  Mass deceleration has been our thesis as articulated in our 06/13/14 note, MACAU: HANDICAPPING MASS DECELERATION.

 

Second, Mr. Bowie also seemed to suggest that conditions in the Mass market are very competitive.  We believe these market conditions may have contributed to the across the board softer margins for the Macau operators in Q2. Meanwhile, while probably stable, it doesn’t look like there is any meaningful uptick in VIP trends.  This is in line with our view that VIP seems to have bottomed but growth remains elusive.

 

CONCLUSION

Our primary concern remains intact:  Mass is decelerating and operators may face increasing pressure to grow this business. While VIP continues to struggle, the decelerating Mass would be the biggest delta from investor expectations.  The sell side seems focused on a 30% Mass growth rate for 2H 2014 but the math and anecdotal evidence (some of it from the MGM call) seems to suggest a rate 5-10% lower.  We see Mass growth decelerating to the high teens by the end of the year.  While we remain positive on Macau long term, Mass deceleration would likely pressure the stocks further.


LEISURE LETTER (08/05/2014)

Tickers: LVS, MGM, MPEL, WYNN, CZR, MAR

EVENTS

  • Aug 6:
    • HT 2Q 9 am:
    • Credit Suisse Gaming, Lodging, Leisure & Restaurant Conference
  • Aug 7:
    • MPEL 2Q 8:30am: , pw: MPEL
    • Credit Suisse Gaming, Lodging, Leisure & Restaurant Conference
  • Aug 8:
    • DRH 2Q 10am: , pw: 153358818
    • SHO 2Q 12n:

COMPANY NEWS

27:HK – Galaxy Entertainment Group Ltd announced a pay bonus and share award to encourage staff at senior manager grade and below to stay with the company until the end of 2017. Galaxy said its new pay increase and share award announcement was timed to coincide with the tenth anniversary of operations in Macau and would be effective from August 1. Terms of the new compensation arrangement include: all full-time team members at senior manager grade and below will be awarded company shares equal to three times their salary in August 2014, known as a ‘Special Share Award’. A cash bonus equivalent to one month’s salary will be issued on July 2015 and 2016 as a ‘Special Bonus Award’.

The share award becomes active, or is ‘vested’, on December 31, 2017.

Takeaway: Making good with labor.

 

880:HK – Mr. Ambrose So, CEO of SJM Holdings commented that the casino operator is not joining the recent trend to compensate worker via a cash or share scheme in an attempt to retain workers as rivals in the industry announce pay bonuses and share award programs to retain and attract staff.  However, Mr. So indicated this position may change near the completion time off the Lisboa Palace. The Lisboa Palace will provide up to 700 gaming tables and over 1,200 slot machines. The total construction cost is approximately HKD30 billion (US$3.9 billion) and is scheduled to open in 2017. 

Takeaway: An interesting counter point to Galaxy and Sand China Limited.

 

CWN:AU – paid $280 million for the nearly 35 acre, former Frontier Casino property to El Ad Properties - a fraction of El Ad's $1.4 billion purchase price.

Takeaway: Mark to market - Las Vegas strip land is fairly valued at $8 million an acre, higher than the roughly $4 million Genting Group paid Boyd for the Echelon site and a fraction of the $34 million per acre paid by El Ad to Phil Ruffin at time of purchase.  The Klondike Casino at the south end of the strip traded for $1.5 million per acre during Q1 2013.

 

9766:JP – Konami Corp’s gaming and systems division reported an increase in net revenue of 11.9% for the three months ended June 30. The Japanese conglomerate announced net revenue from that division reached JPY6.8 billion (US$66.3 million) for the period. Operating income from gaming and systems reached JPY1.3 billion, an increase of 4.8% compared with a year ago.  For the second quarter, Konami’s net revenue was JPY48.6 billion, up 6.6% year-over-year while net income rose by 45.6% to JPY1.4 billion.

Takeaway: Konami taking share.

 

CZR – Despite recent news commentary to the contrary, Caesar's Entertainment said Monday that the company does NOT expect any news regarding a potential sale of the Showboat Casino Hotel and the company is continuing with its plans to shutter the property on August 31.

Takeaway: Could this be a straight faced poker bluff?

 

 

INSIDER TRANSACTION:

 

MAR – Director Lawrence Kellner disposed of 14,599 shares of Class A on Friday at a weighted average price of $64.53 per share and now owns a total of 2,000 company shares. 

Takeaway: More insider selling of shares.

INDUSTRY NEWS

Cotai Construction Update (Macau Daily TImes) According to the Land, Public Works and Transport Bureau, some of the gaming operators face challenges in developing their new casinos and hotels.  Reportedly, Wynn Macau was granted a superstructure construction license while SJM holds a foundation construction license while SCL's Parisian holds a flatwork construction license.

 

(Hoje Macau) In a separate story, the news agency reports Macau Studio City is preparing to suspend work and MGM will likely suspend construction activity. MGM indicated it has completed work on the property basement and would soon begin construction of the tower.  While Wynn indicated no interruption of any kinds in the construction of Wynn Palace.

Takeaway: We only have confidence in the Galaxy and Wynn opening targets.

 

Macau International Airport – During July, passenger volume recorded an 11% increase year-over-year, surpassing 490,000, while the aircraft movement in July was more than 4,300, an increase of 3% over the same period last year. On a year-to-date basis through July 31, passenger volume exceeded 3.1 million and aircraft movements over 29,000, increasing 11% and 8% percent respectively year-on-year. In September, new flight service between Macau and Tianjin will begin with four weekly flights. 

Takeaway: Airlift growth a positive and MIA traffic represents about 20% of monthly Macau visitation.

 

Macau Punter Exclusions – According to the DICJ, 77 people applied for voluntary casino self-exclusion between April and June, up from 50 people in the first quarter. A total of 252 people applied for self-exclusion from Macau’s casinos in 2013. The maximum exclusion period is two years but it can be extended. The applicant can apply for exclusion from all or just some casinos. Those who fail to comply with the exclusion order risk up to one year in jail or a fine

Takeaway: The potential exist for this list to grow significantly.

 

Northeast Regional Gaming – Maryland Live! Casino’s two-story 14,800 square-foot poker room, one of the biggest in the Mid-Atlantic, is set to open Wednesday, August 28 just in time for Labor Day weekend. The room will house 52 tables, raising the casino’s total table game count to 174. The Las Vegas style poker room will feature a variety of limits, high-profile tournaments and games.

Takeaway: More competition for both PENN and Caesars.


Cyprus Gaming Expansion – the government plans to fast-track a bill that will offer a casino license be valid for 30 years, together with a 15-year exclusivity agreement for the successful bidder. The operator awarded with the casino license will also be requested to pay a 15 percent tax on gross revenues.  In the eyes of the government, the operator will offer no less than 100 gaming tables and 1,000 electronic gaming machines and that will be classed as a top-tiered casino resort in Europe, and one of the finest in the world. 

Takeaway: More slots sales.

MACRO

New Chinese Yuan Loans(Shanghai Securities News) big four Chinese banks CNY210B in July vs CNY290B in Jun. Additionally, the big four Chinese banks experienced a net deposit outflow of CNY1.5T last month vs inflows of CNY2.2T in June.

Takeaway: Credit growth abating.

 

Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye

Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.


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